The unexpected consequences of company bankruptcy: An investigation into the spillover effect of local economic liquidation

Abstract

Understanding the impact of corporate failures is crucial, as they not only directly harm the companies involved but also have far-reaching consequences on local economies, leading to increased unemployment, crime rates, and societal problems. The objective of this study is to examine the unanticipated consequences of corporate bankruptcy on regional economies, with a specific emphasis on the ripple effects that go beyond the immediate parties involved. We employed a difference-in-differences model to investigate the effects of corporate liquidation events on 2985 enterprises situated in 276 cities throughout China, using data spanning from 2002 to 2021. The results of our study indicate that towns hosting bankrupt enterprises witnessed a significant decline in their total economic productivity, a rise in unemployment rates, and an increasing dependence on social welfare programs. The impact of these spillover effects was especially noticeable in cities where the insolvent companies had substantial market shares. The findings indicate that company bankruptcies have wide-ranging consequences, requiring comprehensive measures and proactive policies to minimize the effects of future economic disruptions.